Last week, the Federal Reserve raised rates by 25 basis points (bps) in an effort to tame inflation, which has remained above the 2% target for five and a half years. The Fed already had energy, semiconductors, and tariffs on its list of inflationary pressures—and now, it can add rent inflation.
The latest Zillow Observed Rent Index data, which tracks asking rents on new US residential leases, shows rents trending upward (Exhibit 1). At a high level, the increase is not particularly dramatic: The blue line below shows a subtle move from 1.8% year-on-year (y-o-y) in March to 2.5% in August. But rents in the top 100 cities—represented by the shaded gray area—are inflecting noticeably higher.
EXHIBIT 1
US Rent Inflation Is Accelerating with Potentially Significant Implications
Zillow Observed Rent Index (US Rental Price Changes, Year-on-Year)
As of August 2026
Source: Zillow Observed Rent Index. The Index covers approximately 100 major cities in the United States beginning in 2015. The shaded area shows the range from lowest rent inflation to highest among top 100 cities in the index. This index captures asking rents (not agreed rents) for new leases only. It does not include lease renewals.
I expect rents to continue on this path as the alternative of owning a home is increasingly out of reach for many Americans. US home purchase prices have increased by 53% since February 2020, according to the S&P Cotality Case-Shiller Home Price Index, while the 30-year conforming mortgage rate has increased by 350 bps over the same period, according to Freddie Mac. For a homebuyer, the combined effect of higher home prices and higher mortgage rates is devastating from an affordability perspective, with the monthly payment required to buy a median-priced home in the United States up by 124% since February 2020.
This price surge explains, in part, why the median age of a first-time US homebuyer reached 40 years of age in 2025 versus only 30 years of age in 2008, according to the National Association of Realtors—and with homeownership increasingly out of reach, landlords have significant leverage to further hike rents.
My goal here is not to ring alarm bells. I do not expect rent inflation to return to the 15% y-o-y peak of early 2022. But at minimum, a return to the pre-pandemic average of ~4% y-o-y—nearly double the current rate of national rent inflation—appears likely, with potentially significant implications for inflation and interest rates.
This is because rental prices are a component of shelter inflation, which accounts for ~35% of headline CPI, ~44% of core CPI, and ~15%–18% of the Personal Consumption Expenditure Index. Zillow and other private-market metrics of shelter inflation tend to lead government inflation figures by about one year—meaning today’s rent inflation could point to higher official inflation metrics in early- to mid-2027.
Ultimately, this could put more pressure on the Fed to raise rates. Fed funds futures currently suggest three more rate hikes through July 2027, taking the target range to 4.5%–4.75%. It is still too early to conclude whether three hikes will be necessary, but it is clear to me that the Fed must address multiple drivers of US inflation while central banks in Europe and Japan are primarily focused on one: energy prices accelerating due to the Iran war.
At some point, when conditions stabilize in the Persian Gulf and energy flows normalize, I believe the pressure to tighten will be significantly reduced in Europe and Japan. That might not be the case in the United States.
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Published on 23 September 2026.
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